PCE: Federal Reserve's preferred inflation metric increases in January

Latest release comes weeks before US central bank's next policy meeting

Low prices at a Walmart in Austin, Texas. Core PCE, which excludes food and energy, rose 0.4 per cent last month. EPA

The Federal Reserve's preferred metric for tracking inflation rose in January, underlining the central bank's bumpy path towards its long-term 2 per cent target.

The Personal Consumption Expenditures (PCE) Price Index rose in line with expectations at 0.3 last month, up from a revised 0.1 per cent increase in December, the Commerce Department reported on Thursday. On an annual basis, PCE inflation rose 2.4 per cent, down from 2.6 per cent.

Core PCE – which excludes food and energy – rose 0.4 per cent last month. On an annual basis, core inflation rose 2.8 per cent, slightly down from 2.9 per cent in December.

The Federal Reserve closely monitors PCE inflation when forming monetary policy decisions.

The latest inflation reading comes weeks before the Fed is next due to meet on March 20-21, when it is expected to hold interest rates steady at between 5.25 and 5.50 per cent. With the tightening cycle seen as having reached its peak, markets are now looking for when the Fed may begin dialling back rates.

While Thursday's inflation report did little to boost hopes for the Fed to cut rates next month, it did leave open the opportunity for the first quarter-rate cut to arrive in June.

CME Group data showed a majority of traders anticipate the Fed to hold rates steady in March and May before it dials back beginning in June.

Fed officials have indicated they are taking a wait-and-see approach towards future policy decisions, arguing more data is needed to give them greater confidence that inflation is moving down towards their 2 per cent target.

Thursday's news comes weeks after a separate report – the Consumer Price Index (CPI) – showed a surprising setback in the road back to 2 per cent.

Speaking at an event in Long Island on Wednesday, New York Federal Reserve Bank president John Williams said “there will likely be bumps along the way” as inflation climbs down towards the Fed's 2 per cent target, pointing to the most recent CPI data.

Meanwhile, Boston Federal Reserve president Susan Collins, who is not a voting member on the committee this year, also expects the path to be bumpy, “and we should not overreact to individual data readings”.

Federal Reserve Chairman Jerome Powell is expected to provide an update on monetary policy before Congress next week.

The Commerce Department also reported that consumer spending, which accounts for a large majority of US economic activity, rose 0.2 per cent last month, down from 0.7 per cent following the holiday period in December.